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Lecture 11

MHR 749 Lecture 11: MHR WEEK 11

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Ryerson University
Human Resources
MHR 749
Margaret Yap

WEEK 11: PAY FOR PERFORMANCE PLANS Pay for Performance [P4P] Plans that link pay to productivity, profitability, or some other measure of individual, team or organizational performance Signals a movement away from entitlement toward pay that varies with performance. Also called variable pay plans Accurate performance appraisal or measurable outcomes is a precondition for effective pay-for-performance plans These plans can have a positive impact on performance if they are designed well Can be Individual, group or organization-wide plans and short-term or long-term Why Variable Pay? Potential talent shortage employers need tools to attract, motivate and retain their valued employees. Advantages for Employers: o Motivate better employee performance o Manage total compensation costs o Align business and individual goals Advantage for Employees: o Performance are rewarded accordingly Specific Pay-for-Performance Plans: Short Term 1. Merit pay 2. Lump-sum bonuses 3. Individual spot awards 4. Individual incentive plans Merit Pay A merit pay system links increases in base pay to how highly employees are rated on a performance evaluation. Employee achievements are rewarded every year the employee remains on the job. Merit pay is expensive. Many argue it does not achieve the desired goal of improving employee and corporate performance. Merit pay does have a small, but significant, impact on performance. Managing Merit Pay Improve accuracy of performance ratings Allocate enough money to truly reward performance Make sure size of merit increase differentiates across performance levels Requirements to Link Pay to Performance Specify a continuum describing different levels from low to high on performance measure Decide how much of a merit increase is given for different levels of performance See Exhibit 11.2 A more complex guideline ties pay not only to performance but also to position in the pay range See Exhibit 11.3 Designing Merit Guidelines What should the poorest performer be paid as an increase? How much should average performers be paid as an increase? How much should the top performers be paid as an increase? What should be the size of the percentage increase differential between different levels of performance How to Create a Merit Pay Grid Merit Grids Combine 3 Variables: o Level of Performance o Distribution of Employees Within Pay Ranges o Merit Budget Increase Percentage Lump Sum Bonuses Used as a substitute for merit pay. Based on performance and received as an end-of-year bonus. Not built into base pay. Viewed as less of an entitlement than
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